Magazine

Too Much Room at the Top

March 09, 2003

The Media Harbor, on D?sseldorf's once-derelict riverfront, is one of Europe's most eye-catching new developments. Designed by world-class architects including Frank Gehry, the shapely and sinuous complex was intended to be the must-move-to address for design, advertising, media, and other image-conscious companies. Office space there rents for $17 to $23 per square meter. That, however, is when it rents at all. Many offices at Media Harbor are unoccupied. The sluggishness of the German economy, coupled with three years of stock market turmoil, means few companies can afford such fancy digs. All told, 48,000 square meters of space in and around the Harbor are empty -- more than twice as much as was leased over the past year.

It's the same all across Germany. From Hamburg to Berlin to Munich, the commercial-property market is heading for its worst funk in a decade. Vacancy rates are rising, and rents are falling. In Frankfurt, the country's financial capital, over 420,000 square meters of office space are vacant -- 50% more than at the end of 2001. City-center rents have fallen from a peak of about $50 a square meter in 2001 to $35 today. "The slump in the banking and service sectors [which account for 60% of demand in Frankfurt] has made the market particularly volatile," says Michael Fritz, European director for Jones Lang LaSalle Inc., the international real estate and investment-management company.

Not surprisingly, property companies and their backers are hurting. Last year, Philipp Holzmann, one of the country's biggest construction companies, went bust. In January, property firm Uniprof Real Estate Holding conceded that it, too, could go belly-up if its bankers don't come to the rescue with fresh loans. On Feb. 3, Dyckerhoff, Germany's biggest cement maker, said slumping demand would force it to cut 400 jobs. Meanwhile, the banks, already burdened by record levels of nonperforming loans, fear a new wave of bad real estate debt. According to analysts, up to $2.5 billion in property loans could go sour this year. That scenario was a leading topic when bankers and insurers met Chancellor Gerhard Schr?der for crisis talks on Feb. 16. One idea discussed at the meeting: setting up a state-sponsored "bad bank" to take over big nonperforming loans.

The lackluster demand for space reflects the underlying weakness of the German economy. Companies are responding to slow growth by sacking staff and canceling expansion plans, so they need less space. Occupancy levels and rents will continue falling for the rest of this year, says Immo von Homeyer of IVG Real Estate in Bonn. The market won't improve before 2004 at the earliest, he predicts.

To make things worse, new buildings that were started in the heady days of the late 1990s are only now coming on the market. More than 450,000 square meters of new office space was completed in Hamburg last year, and an additional 260,000 square meters is on the way this year. The situation is worse in Frankfurt, which likes to call itself Mainhattan because of its high-rise skyline. More than a million square meters of new or refurbished offices will come on to the market there this year and next.

Germany's free-spending banks eagerly financed most of those ambitious projects -- even though they had been burned badly in the late 1990s by collapsing East German real estate prices. Now they're drawing in their horns. Developers say they can only get funds for buildings that are pre-leased. "We won't even touch speculative developments now," says the head of real estate lending for one of Germany's leading banks.

But there are still municipal dreamers. Perhaps inspired by Media Harbor, Frankfurt is redeveloping its rundown Westhafen (West Harbor) area. More than 200,000 square meters will hit the market in the next few years. Like their counterparts in D?sseldorf, the buildings will be stunning. Unless the economy revives, though, they may end up as gorgeous, empty monuments to the boom years. By David Fairlamb in Frankfurt